The warning comes after Lloyds shares took a hit after the bank made a £3.2bn allowance over the mis-selling of payment protection insurance.
Analysts at Morgan Stanley said: “We still think that the UK housing market will see another leg of correction. Our central case is that UK house prices will be 10% below fourth-quarter 2010 levels by the end of 2012. Among UK banks, Lloyds is most exposed and we now expect 21% lower profit before tax than consensus in 2012 estimates.”
Analysts pointed out that Lloyds stands to lose the most from the house price falls due to higher loan losses as collateral values drop, higher risk weighted assets and capital demands due to model changes, as well as subdued mortgage loan growth.
The latest UK house price data from Nationwide stated that house prices have dropped by 1.2% over the past year. Although prices rose month-on-month in May as economic growth resumed, the building society cautioned that further gains would be limited by the slow pace of recovery.
Morgan Stanley’s also noted that 54% of Lloyds loan book is in UK mortgages at a value of £341 as of 10 December 2010. The analysts forecasted that 27% of those loans would be in negative equity by December next year.
The same analysts see a comparatively small impact on Barclays, HSBC and RBS given their relatively high asset quality due to less exposure to the more risky 90% LTV band and low proportional exposure.
Graham Spooner, investment adviser at The Share Centre, said: “There’s no quick fix; if you’re still in Lloyds, you must be taking a very long-term view.”
